2023-10-17 14:04:24 ET
Summary
- Tapestry, Inc. is acquiring Capri Holdings Limited for $57 per share, offering a 10.4% upside if the deal closes as planned.
- There is a potential for an overbid to emerge, but the stock did not respond significantly to the rumor.
- The deal is risky due to Tapestry's smaller size, but the valuation of Capri Holdings leaves room for potential upside.
Tapestry, Inc. (TPR) is acquiring Capri Holdings Limited (CPRI) for $57 per share. CPRI shares trade around $52. That means there's 10.4% upside to the deal closing as planned. If the deal fails, Capri likely falls back somewhere to the $30 to $38 range.
There's been a rumor a potential overbid could emerge. The source is Betaville. In my experience, the rumors that make it there don't always result in things happening. That's not to say the rumors aren't factual, but it simply may be a function of Betaville reporting more aggressively (compared to Bloomberg for example) on things that "could" happen but are far from a sure thing. Capri stock didn't respond all that much to the rumor.
According to Betaville, Agnellis and Kering (PPRUF) had held talks with Capri before the company went with Tapestry. From the merger agreement, it does not seem like other buyers were dying to acquire Capri. There were no actual rival bids issued, for example. At the same time, Capri and Tapestry agreed on the price relatively quickly but fought hard about the break fee. Capri wanted to keep it down, and Tapestry wanted to increase it beyond the top of the range generally observed there. They settled on 3% of the market cap. That is a fairly large breakup, fee but the top of the range sits around 4%. A large break fee on the target tends to dissuade rival bids strongly.
This deal is less than a lock because Tapestry has a market cap of around $6 billion (after its share price swooned), slightly larger than Capri's. Bridge financing is in place, and part has already been converted to bonds. Still, this is a "bet the farm" endeavor, and these deals tend to be somewhat riskier.
The primary reason I like this deal is the Capri Holdings valuation.
If I pull up the set of peers (this includes companies that own a mix of mostly premium and luxury brands) on Seeking Alpha, the valuation doesn't stand out even at the deal-induced premium it is trading at:
When I pull up a set of luxury companies, it becomes apparent the market values these more highly:
This is especially evident in the EV/sales, P/E, and cash flow multiples. Capri owns Versace, Jimmy Choo, and Michael Kors. I'd classify Versace and Jimmy Choo as luxury brands and Kors as a premium brand. I guess that even if the Versace and Jimmy Choo brands were impaired a little bit, they could be restored. Michael Kors represents 2/3 of the company's sales, dragging the overall multiples down. When Barclays (BCS) was shopping around the company, only Tapestry was interested in taking out the whole thing, but no less than three other parties wanted to lift out or participate in Versace and Jimmy Choo. I think there's a hidden value that will be most easily unlocked by a large player who trades at a luxury premium. This makes the deal slightly less risky for Tapestry. It is conceivable it could flip either brand after the deal closes to deleverage more quickly.
HSR should have expired, but this wasn't announced. Likely, there is an issue, or it needs to be refiled. It is hard for me to imagine great antitrust interest because these are 1) relatively small players in a relatively large and dynamic market, and 2) I'm not sure protecting premium/luxury buyers is at the top of the agenda for antitrust agencies. Partly tongue in cheek, I'm unsure what they'd be protecting against. If products are Veblen goods, the high prices are what consumers want to begin with.
In conclusion, there is quite a bit of upside here. The deal is risky because the acquirer is relatively small in size. HSR isn't in yet but it's hard to imagine extensive challenges. The company was likely undervalued before the takeout. There were many interested parties for the two smaller segments. Financing is in place. An overbid has been rumored, and the parties negotiated hard about the deal break fee.
The Capri valuation definitely leaves room for something to happen, but I wouldn't put the odds of something materializing over 7%. There is 10.4% potential upside for Capri Holdings Limited shareholders if the deal closes as planned. I expect this to occur, barring extensive antitrust problems, within 2-3 months. If the deal were to break, the shares likely fall somewhere in the $28-$38 range, notwithstanding the substantial fee. Considering the above, this is a reasonable risk/reward that I'm adding to my portfolio.
For further details see:
Capri Holdings: 10.4% Potential Upside Within Estimated 2-3 Months